Jan Dhan Yojana can provide Modi with political capital for further reforms

Prime Minister Narendra Modi has begun to build political capital through a new financial inclusion push, named Pradhan Mantri Jan Dhan Yojana, which aims to bring every household in India into the formal financial network by Independence Day next year. Once every household is brought into the fold through a bank account, there are both economic and political spin-offs for government. Modi is building on some of UPA’s cherished ideas such as financial inclusion. Presumably the differentiator will be in actualising ideas where his predecessor’s performance was disappointing.

The new financial inclusion push is necessary for its own sake. Access to a bank account and other financial products can have a transformative effect on poor Indians. Around 100 million families are out of the formal financial system, severely limiting their opportunities. Bringing them in helps the government to put in place future economic reform, such as direct cash transfers, to correct the prevailing subsidy regime. Once people are freed of the clutches of a tyrannical bureaucracy through cash transfers, they will demand more of politicians. In short financial inclusion can trigger a cycle of virtuous developments while also bringing in goodwill for the NDA government.

This makes it critical for the government to get implementation right. It can benefit from lessons learnt from earlier failures. One failure was the absence of follow-up. Accounts would be opened and remain dormant, draining banks’ enthusiasm in the process. On this occasion cash transfers for a variety of schemes — including rural employment guarantee programmes — and an overdraft facility can be leveraged to keep accounts active. The foundation for this drive will be mobile phone technology and local agents for banks called business correspondents. Political backing is critical for this drive as there will be challenges along the way. A successful financial inclusion drive is necessary for another reason. It can provide the political cushion for further reform.

Reforms in other areas will need Modi to take on many interest groups including the sangh parivar. Without building political capital, carrying out other reforms will be more difficult. Financial inclusion is the one area where a central government can bypass states to directly transform lives. The success of the drive to provide bank accounts to 100 million families in a year will determine this government’s efficacy over five.

This piece appeared as an editorial opinion in the print edition of The Times of India.